Welcome to the sixteenth of our Entrepreneurial Wednesdays series. In this series, I share my thoughts on lean entrepreneurship as I take my first steps in my journey. I will be sharing my lessons learned with you.
I tend to keep my promises. And so, here are the three growth engines that I promised to discuss in the last part of the series.
Growth engine based on a customer is nothing that I have to deeply explain. Everyone gets the idea. But what I should dig deeper in is a stereotype which kills businesses when it comes to this type of growth. Once a customer starts to use a company’s product, the company thinks that this will last forever. And that is SO wrong. Business is not a fairytale. The use of a product by a customer is very dynamic. This is especially important in the case of SaaS companies. Just as tastes can change, also can preferences. And if you want your business to be stable in every way, you have to make sure that your customer sticks with you both in good and bad times.
The benefits of Churn Rate
In order to understand how many people unsubscribe, or simply leave your product you have to make sure that you have a clear idea of your CHURN RATE. Churn rate is a number which says how many customers leave your customer base. Simply, how many people stop using your product. The math is pretty simple here. If the rate of customer acquisition is higher than the churn rate, it’s a win. If it’s vice versa, you are in trouble. Churn rate can also have very bad impacts on a company’s approach towards growing the business. Just as I mentioned earlier in the series, many companies tend to focus on broad metrics. This means that they look at the rate of customer acquisition. This rate can be excellent but the growth can still be slow. And this leaves the company in a very confused situation. This is because the comparison between the customer acquisition rate and churn rate shows that they are almost the same. That means that while they are many new customers starting to use the product, the same amount or even more are leaving the product.
Without understanding this, the light at the end of the tunnel is getting closer. The solution here is to focus on either trying to lower the churn rate or focusing on existing customers and trying to make them interact with the product more regularly.
In the end, the growth engine based on customer needs a lot of attention and strategic thinking. It’s very important to understand what needs to be done in order to stabilize the churn rate and to understand what makes your customer leave or on the other hand stick with the product.
Let’s go Viral!
I believe everyone in the business knows the story of how Hotmail grew into gigantic size ”overnight”. It was because the founders did a good job going viral. They simply put a short sentence on the bottom of each and every email sent from their service and that was enough. Yeah, with viral growth engine it’s all about hitting the one spot that can rocket you to the heaven of growth. But if you want to stay there, that’s a completely different chapter. Let’s have a look at it.
Just like any other growth engine even viral engine can be quantified. This is thanks to the viral circle, the speed of the circle is the most relevant article and is based on viral coefficient. This coefficient how many new customers use the product thanks to each new customers that has been registered. So basically, how many friends do you bring with yourself?
In the Lean Startup book, the math described in connection with the viral coefficient is very simple. If the coefficient is 0,1, it means that 1 out of 10 customers brings one of his friends. This is a very poor number and it’s not, in any scenario, sustainable. If, on the other hand, is the coefficient higher than 1,0 your future is so much brighter! Even small changes in the coefficient can be either disastrous or super profitable for the company. That is why there is a need for special focus on these numbers and it should be the no.1 priority if a company relies on the viral growth engine.
Payment in advance
I know I have already said it a couple of times but again…the math is brutally simple with this one. When you have to invest into advertising and what to have a clear view on how profitable you are when it comes to customer acquisition, there is one thing you need to pay attention to. How much money does it cost you to acquire one customer? This is where the whole game starts and ends, that is the foundation where you realize if this growth engine actually makes sense for you. There are many ways to experiment with this engine and optimize it. Sometimes it doesn’t work for a period of time and suddenly boom! But this doesn’t happen very often so it is always for your own good to try to optimize it.
If you find yourself being profitable, meaning that your costs are lower than what you make on the customer that has been registered, you have to start figuring out how to do the whole acquisition process faster. The two main things that can be done are either lowering the costs per customer or increasing the profit per customer.
Another important metric is LTV, lifetime value. This describes how much money customer spends on the product during his time with the company. It’s important that to get LTV you need to take overall profits per customer and take off the costs connected to the whole lifetime of the customer. With LTV you get to know how much money you can reinvest into growth and also to the paid engine. To make the growth engine faster looking through LTV metric you need to calculate the difference between CPA (costs per acquisition) and LTV to understand how fast can the growth engine be. Only after this calculation you can clearly see how you can optimize the cycle.
With so many companies in each and every industry, it’s no surprise that CPA can go higher over time. It’s because every single company tries to optimize and it’s looking for a way to over-perform your growth engine. Trying to perform better than the growth engine of your competitor is actually a competition itself. In order to achieve a certain level of sustainability with paid growth engine you need to make sure that you have a sure and stable stream of money going from your existing customers, otherwise, it’s a very risky game.
Grow, baby, Grow!
That’s it my fellow startupers! These were the three growth engines I promised to discuss in the beginning. I hope I did a good job. Of course, in the startup world, there are many new innovations coming to life every day, but I believe that I managed to cover just enough information that will give you a good start. If, by any chance, I didn’t cover something you would like to know more about. Just leave a comment here and there. I will surely reply!